21.

A financial institution has entered into an interest rate swap with company X. Under the terms of the swap, it receives 5% per annum and pays six-month LIBOR on a principal of $5 million for five years. Payments are made every six months. Suppose that company X defaults on the sixth payment date (end of year 3) when the six-month forward LIBOR rates for all maturities are 3% per annum. Assume that six-month LIBOR was 3.5% per annum halfway through year 3 and that at the time of default all OIS rates are 2.5% per annum. OIS rates are expressed with continuous compounding; other rates are expressed with semiannual compounding. The loss to the financial institution is closest to: O a. $231,365 O b. $347,048 O c. $462,730 A financial institution has entered into an interest rate swap with company X. Under the terms of the swap, it receives 5% per annum and pays six-month LIBOR on a principal of $5 million for five years. Payments are made every six months. Suppose that company X defaults on the sixth payment date (end of year 3) when the six-month forward LIBOR rates for all maturities are 3% per annum. Assume that six-month LIBOR was 3.5% per annum halfway through year 3 and that at the time of default all OIS rates are 2.5% per annum. OIS rates are expressed with continuous compounding; other rates are expressed with semiannual compounding. The loss to the financial institution is closest to: O a. $231,365 O b. $347,048 O c. $462,730